By David Laprad
As the coronavirus continued to make its presence felt in every corner of the business realm, a panel of area commercial Realtors convened via Facebook Live on April 23 to discuss the impact of COVID-19 on their business.
Hosted by Russell Elliott, 2020 president of Greater Chattanooga Realtors’ Commercial Council, the panel consisted of David DeVaney, president of NAI Charter, Benjamin Pitts, commercial property agent with Herman Walldorf, Tiffanie Robinson, CEO and president of Lamp Post Properties and Second Story Real Estate Management, Lisa Brown, managing director of KW Commercial Downtown, and Robert Fisher, commercial property agent with KW Commercial.
This group brought 84 years of collective experience in commercial real estate to bear on questions about how COVID-19 is impacting their business, how landlords and tenants are responding to the economic disruption, how banks are handling the pressure and more.
Elliott began the 50-minute discussion with an ice breaker everyone was prepared to answer:
How has COVID-19 impacted your commercial real estate business?
DeVaney: “When the stock market starting going down mid-March, our company had eight to 10 sales under contract and at least that many leases, and the ones that were in due diligence immediately either asked for extensions or just walked away from the deal. We’ve had a couple of closings, but everyone else has said, ‘Let’s wait and see how bad this really is.’”
Pitts: “While we’ve seen some deals deferred, we haven’t seen any canceled. We’ve completed a couple of owner/occupant deals, and we have three purchase-and-sale transactions that should close in the next month or so.
“I think a lot of the difference between those that have closed and those that haven’t has been driven by the bank’s willingness to close a transaction, and an investor/development deal that doesn’t already have leases in place doesn’t make a lot of sense right now.
“On investor/development deals, banks want to wait and see where things stand after more of the dust settles, and owner/occupant deals are a little easier for banks to quantify the risk, even in the midst of COVID-19, so they close those deals.
“We have also closed some lease deals I didn’t expect to; we closed a long-term lease on some flex space with a pest control company and we had a retail lease deal go pending with a letter of intent in the last week and another retail lease deal that’s on track to have its letter of intent this week. Some of the activity we’re seeing is very encouraging.’’
Robinson: “It would be hard to not define the last six weeks as a roller coaster because that’s what it’s been. We’ve seen positive things, but we’ve also seen people unable to pay their rent.
“Our clients on the property management side are working through deferment deals. As property owners, we’ve also offered deferments to our tenants.
“On the brokerage front, we’re seeing a lot of activity in certain industries. We work heavily in the medical field, and medical has not stopped. We’ve also been working on deals with a number of national retail tenants, and these companies are not slowing down or stopping.’’
Brown: “The deals I have are holding together, but our due diligence is extending into June on three of them. I think that has to do with their confidence level. This week has been strange, though; properties that haven’t shown in the last month have shown three times in two days, which is encouraging.
“We’re also trying to manage some unrealistic expectations. We’re getting calls on properties that have been out there for a few months, and people are coming in with a lower offer than would be acceptable. There’s an unrealistic expectation that sellers are really motivated already but I’m not seeing that.’’
Elliott: “I had several deals in the pipeline, and a couple of those hit the pause button and decided to wait until May 1 to see what was going to happen. I had one owner-occupant property under contract, and they let their due diligence expire and are moving toward closing.
“I’m still getting phone calls from out-of-town brokers who are looking for industrial deals. I think that market is going to be one of the hot spots and come out of this doing really well.
“And like Tiffany and DeVaney, I have tenants, so I’ve been dealing with rent abatement requests.’’
DeVaney: “Do you have a percentage of how many tenants are asking for deferment?’’
Elliott: “Less than six out of a couple dozen.’’
DeVaney: “On the properties we manage, we have roughly 130 tenants, and 13% of them have asked for a deferment.’’
Robinson: “About 10% of our tenants asked for a deferment, but as soon as they received their PPP dollars, they canceled the deferment and paid their rent.’’
Elliott: “I’ve talked with some landlords who are asking tenants who have asked for abatements to show them their financials and proof that they have applied for the PPP and SBA loans. They’re requiring them to produce documentation that they actually need an abatement.
“I’ve also talked with some landlords who said they’re not getting any requests, and I talked with some landlords who made arrangements to give their tenants an abatement up front as a show of their support.
“The tune I’ve been hearing is if they can pay, they need to pay, but if they’re really struggling, then you should try to work with them. But I think there are tenants who are taking advantage of this situation. Not all of them need an abatement, but they see the opportunity to obtain one.’’
What are you hearing from building owners and tenants?
DeVaney: “Most property owners understand we’re in this together and you can develop goodwill by working with your tenants. We own some properties and are more than willing to work with our tenants on rent deferment, but there are property owners who are being sticklers and saying, “Show me your financials. Show me how this has impacted you,” specifically if their tenant is in an industry that hasn’t been as impacted, like construction and building supplies.
“But your heart goes out to your tenants. One of our tenants owns a yoga studio. That’s her livelihood, and all of a sudden, it’s not there, and she’s nervous about paying rent. It feels good when you can negotiate with the property owner and tenant and come to a resolution that can help the small-business owner.’’
Pitts: “At some point, every landlord invests in every tenant’s operations and every tenant invests in every landlord’s property, and those partnerships have never been more important than they are right now.
“A lot of businesses have little to no cashflow and can’t pay their rent, and a landlord’s cashflow is rent payments, so they can’t pay their mortgage, which brings us to banks and their impact on landlords and tenants. Most commercial lenders seem to be aware of that and seem to be working with their landlords who have good credit to defer payments on mortgages. This allows landlords to then work with their tenants.
“There are a few landlords and a few tenants who are trying to dictate terms to the other side, which is not smart. The smart landlords and tenants are working together and pursuing other ways of managing operating capital such as a PPP loan or workforce reductions. We’re seeing a lot of people working together to figure out something that works for both sides.’’
Fisher: “I have a landlord who has a B-grade retail strip center with 11 spaces and two vacancies. Out of nine tenants, four have paid April. So he’s getting less than 50% of the occupied rent, which is a tough situation.
“Those of you who own property or are close to your landlord, have your landlords who are giving up rent had their mortgages deferred?’’
DeVaney: “We asked the bank for one project to defer the mortgage, and it took just a phone call. That depends on how much cash you have in the bank; hopefully, you have enough reserves to go a few months without tenants paying you. We’re lucky to be in that position, but we did ask for a deferment on one project.’’
Robinson: “A number of our tenants have said they don’t understand what the SBA is putting out there, so we’ve tried to be a resource to our tenants to help walk them through the PPP program and the city’s grant program. What we’re learning through this is that your bank relationship is the most important relationship you could have.’’
Elliott: A lot of the residential agents have shifted from in-person showings to virtual showings. Have you been doing anything different?
Brown: “We’ve done video and virtual, but some of our properties are so big, it’s hard to grasp what we’re showing. What I’m finding is that the consumer still wants to come to the property, so I’m being respectful of social distancing and opening up everything before they arrive so they don’t have to touch anything.
“The challenge of doing video on the commercial side is the owners don’t want the contents of the building to be out there. There are confidentiality and security issues to consider, and they don’t want a video out there that people can watch again and again.’’
Pitts: “Residential showings often involve a buyer entering a seller’s living space. They’re strangers and they don’t know what kind of protocols one or the other might have followed prior to the showing, and typically, neither the seller nor the seller’s broker is present for the showing.
“For commercial, you can talk with the occupant of that space, learn what their protocols are and follow them. The other difference is the seller and seller’s broker are both present. So, someone from the seller’s side knows who was there and what they touched, and can figure out what to do to address violations of their standard protocol.
“My last showing was before they said to wear masks. If we’re going to reopen the economy, we’re going to have to start doing those things. So, if we go to a showing, we should bring masks and ask our clients to wear them.
“As far as closings, over the last 10-12 years, more and more commercial transactions have closed in escrow, with both sides shipping documents or signing separately rather than gathering around the closing table. COVID-19 hasn’t changed that.’’
Robinson: “We’re wearing masks and taking a lot of meetings over Zoom, and while that’s working, we like human interaction, so hopefully, we’ll be interacting with people soon.’’
Elliott: What are you seeing from the lending side?
Robinson: “We have a new ground-up project downtown, and our closing is on hold until our bank gets through everything that’s going on with the SBA. It’s interesting that they’re waiting to process a new loan since that’s how they make money.’’
Brown: “I was told the same thing yesterday on a client who wants to buy one of our buildings. I took them to our guys who normally help us through situations like this and they said, ‘You’re going to have to hold for two weeks. We can’t even look at it right now.’ “
Elliott: If you had a crystal ball, what do you believe you would see as the long-term effects of COVID-19 on commercial real estate? For example, do you think we’ll see less need for office space as remote work continues?
Pitts: “We’re seeing people turn away from open offices and shared workspace. I think COVID-19 and just an overall awareness of germs and viruses is going to make people want to control their own space.
“And if people are going to practice social distancing at work, then offices with long rows of desks back to back and right next to each other are going to have to get 6 feet between each person. So the desire to control your own space and increase your distance from others is going to increase the need for space.
“Then the question becomes, ‘Can a tenant pay more for the space or do they have to get more space for the same rent?’
“With respect to restaurants, I think there’s going to be more dividers between tables, or more space between tables when there are no dividers. That’s going to create upward pressure on needed square footage.
“So the questions will be, “How much of what is lost by businesses closing and people working from home be replaced?” and “How will that affect rates?” I think there will be downward pressure on pre-square foot rates across the board except maybe industrial.’’
Robinson: “We represent a tenant who was originally looking for 6,000 square feet and as of two weeks ago is looking for 2,000 square feet because they’re going to downsize their space and let some people work remotely. But I’m bullish on human contact and believe teams function better when they’re in the same space.
“I also believe younger workers like myself, who’s home schooling three children in the other room, can’t do this forever.
“We think restaurants will decide to have a small space because the upsurge in delivery services will continue, which is not a bad thing. Restaurants have pivoted the most during this thing, which is good; they should have already innovated.
“Food concepts will probably downsize but maybe increase their profits because they’ll still have a strong space with people coming in and eating while also figuring out how to increase their delivery service.’’
DeVaney: “I believe the next six to nine months are going to be pretty challenging. Deals are going to move more slowly until we can figure out how to control the spread of the virus.’’
Fisher: “My crystal ball says this is going to be an exciting 12 months with lots of opportunity. With pain comes opportunity. Businesses will be closing and people will be buying those business. I think opportunities will abound for innovative people who can react quickly, and that will be good for Realtors and opportunists.’’